December 20, 2012
TORONTO—After a strong late-summer rally, Scotiabank’s commodity price index inched down in October and dropped by 2.3 percent month-over-month (m/m) in November, as commodity prices contended with opposing forces in late 2012.
“We are experiencing another bout of concern over the outlook for global growth and the potential fallout from the US fiscal cliff in early 2013, dampening oil and grain prices,” said Patricia Mohr, VP, economics and commodity market specialist at Scotiabank. “That’s only partially offset by news that China’s economy is revving up again, lifting base metal prices, especially copper.”
As a result, said Mohr, commodity prices have dropped 8.4 percent year-over-year (yr/yr) through November and are currently 16 percent below the near-term peak in April 2011, just prior to the advent of concern over excessive Eurozone sovereign debt and the negative impact on global growth.
The oil and gas sub index (-14.4 percent) led the yr/yr decline in overall commodity prices through November 2012. Lower light and heavy crude oil prices in Alberta and considerably softer propane prices in Edmonton and Sarnia more than swamped a slight gain in Canadian natural gas export prices (linked to a significant late-year rally to an estimated US$3.69 per thousand cubic feet of natural gas in November).
While international oil prices remained strong in 2012, a price discount on Edmonton light crude oil emerged and the discount on Western Canadian Select heavy oil (WCS) widened—largely the result of inadequate export pipeline capacity. “The cost to the Canadian economy of these wide oil price discounts is enormous,” said Ms. Mohr. “On heavy oil alone that’s about US$9 billion in 2012 from the WCS discount off WTI oil, taking into account a normal quality differential, plus another US$17.7 billion due to the WTI discount off world prices, as measured by Brent.” Rail shipments are increasing, given virtual full utilization of export pipelines.
The metal and mineral index also lost ground in 2012, down 13.1 percent yr/yr as of November. Most base metal prices held up well, with copper ending 2012 on a strong note at US$3.60 per pound (45 percent profit margin), up from US$3.43 in late 2011. Lead was the fifth-best performing of the 32 commodities in the index. But double-digit declines in coking coal, iron ore and steel alloying metals alongside stagnant world steel production and a mid-summer inventory correction in China’s steel industry more than offset the relative strength in some base metals.
On a more positive note, the forest products sub-index posted a substantial recovery in 2012 (+12.9 percent yr/yr through November). After a challenging environment since 2008—linked to a prolonged and sharp downturn in US housing—oriented strand board (OSB) and lumber producers enjoyed a substantial recovery in earnings in 2012. A modest recovery in US housing starts is hitting a wall of tighter supply, given substantial mill closures since 2006 (the equivalent of 140 sawmills across the US and Canada).
Agriculture was another pocket of strength in 2012 (+5.2 percent yr/yr in November). Canola (an oilseed) posted the third-largest price increase in 2012, followed by barley.
In 2013, commodity prices will receive a lift from raw material re-stocking, after liquidation or deferred orders in 2012. This is already the case in China, where a pick-up in orders from steel producers, after a sharp inventory correction last summer, has boosted spot iron ore and coking coal prices.
Lumber and OSB are expected to post a multiple-year recovery through mid-decade, said Scotiabank. Western Spruce-Pine-Fir 2×4 lumber prices have climbed from an average of US$255 per thousand board-feet (mfbm) in 2011 to US$298 in 2012 and should reach US$340 in 2013 and US$375 in 2014.
With—a deeply discounted commodity—spot prices may have bottomed at US$40.75 per pound in early November, rallying to US$44.75 in mid-December. Long-term contract prices remain at US$60 prior to escalation at time of delivery. Palladium may also be set for a rebound alongside strengthening demand in China for auto catalysts for small-engine gasoline cars, supply uncertainties in South Africa and the possible depletion of the Russian government stockpile.